Will stock prices continue their uptrend through the end of the month?
February on the stock market started on a very positive note, with record highs for the major indexes. But will the uptrend manage to continue until the end of the month? The last two sessions have shown that bulls may have a hard time continuing the trend. We may have to deal with a correction or consolidation of several weeks of advances. With the season of quarterly earnings announcements coming to an end and a series of important economic data, profit taking may follow.
On Tuesday, stock prices edged slightly higher, with the S&P 500 index gaining 0.23% by the close of the day. The index further accelerated its uptrend on Friday, reaching a new record high of 4,975.29 following top tech earnings releases and better-than-expected economic data. My short-term outlook was still neutral because the market seemed overbought and ready for a downward correction. When in doubt, it’s better to stay out of a position than to try to catch a top and open a short position too early.
Although a downward correction is widely expected, the overall market sentiment remains bullish, and the index may get another chance to reach the 5,000 level. This morning, futures contract indicates that stocks are likely to open 0.3% higher, still relatively close to their highs.
Quoting Monday’s analysis, “Last week, upward momentum was fueled by earnings releases and expectations of a more accommodative monetary policy from the Federal Reserve. However, on Wednesday, the Fed's pivot in monetary policy became less obvious, leading to a sell-off in stocks. Stock prices reacted negatively to the release of the Fed's monetary policy and Jerome Powell's press conference. The S&P 500 index sold off to a local low of around 4,845. However, on Thursday and Friday, strong earnings releases and positive monthly jobs data drove prices back up to new records.
Investor sentiment significantly improved last week; the Wednesday’s AAII Investor Sentiment Survey showed that 49.1% of individual investors are bullish. The AAII sentiment is a contrary indicator in the sense that highly bullish readings may suggest excessive complacency and a lack of fear in the market. Conversely, bearish readings are favorable for market upturns.”
Last Tuesday, I wrote that “Despite new highs, it seems that a correction scenario is likely in the near term. (…) caution may be advised, as a correction or consolidation could occur at some point.” The prediction proved correct until Thursday when the market began rallying again. However, today, the same statement remains very true, as the market still appears overbought in the short term.
The S&P 500 is likely to extend a consolidation. On Monday, the market entered a consolidation following Thursday’s-Friday’s rally, and yesterday, it went sideways again. However, the index remains close to its Friday’s all-time high, as we can see on the daily chart.
S&P 500 Rallying Since Early January
The weekly chart of the S&P 500 reveals an over month-long rally, starting from early January. The market has been accelerating its medium-term uptrend since a relatively flat correction in December. However, there are indications that another correction or consolidation may be in the cards.
Nasdaq Still Relatively Weaker
On Friday, the technology-focused Nasdaq 100 index reached a new all-time high at the level of 17,682.29, only slightly surpassing its January 24 high of around 17,665. Despite record-breaking daily rallies in stocks like META and NVDA, the Nasdaq remains relatively weaker compared to the broader stock market. There is underlying weakness, as not all tech stocks are hitting record highs. Overall, the recent weeks of trading for the Nasdaq seem more like a consolidation rather than a clear uptrend.
VIX Closer to 13 Again
The VIX index, also known as the fear gauge, is derived from option prices. Yesterday, it fell to the 13 level once again, indicating a lack of fear in the market, as stock prices hovered around their local highs.
Historically, a dropping VIX indicates less fear in the market, and rising VIX accompanies stock market downturns. However, the lower the VIX, the higher the probability of the market’s downward reversal.
FANG Stocks Ready for Correction?
The NYSE FANG+ (NYFANG) index offers exposure to 10 highly-traded tech megacap stocks, including Apple, Microsoft, Amazon, Alphabet, Nvidia, and Tesla. Let’s examine the daily chart of this index. It shows an acceleration of the rally that occurred last week following the earnings release from Meta Platforms and another record-breaking advance of Nvidia stock. While tech stocks are becoming increasingly overbought, there have been no confirmed negative signals thus far.
Futures Contract Extends Consolidation
Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it’s trading closer to the record high again. The nearest resistance level is at around 5,000. On the other hand, the support level is at 4,940-4,960, among others.
Conclusion
Today’s trading session is likely to start on a positive note, with the S&P 500 index potentially attempting to set a new record high and move closer to the 5,000 level. However, in the short term, the possibility of a downward correction cannot be overlooked. A quick glance at the chart reveals that the S&P 500 index has recently become more volatile.
Returning to the market forecast for the end of the month, I think that despite the clear uptrend, which has further accelerated since the beginning of the year, at some point, we should expect a correction or a longer consolidation. Similar to what occurred in December. After quarterly results and key economic data, it seems that some profit-taking will occur.
On December 21, I mentioned that “in a short-term the market may see some more uncertainty and volatility”, and indeed, there was a lot of uncertainty following the early-December rally and the breakout of the S&P 500 above the 4,700 level. However, the previous week’s price action left no illusions of a potential medium-term trend reversal. On Tuesday, I noted that “The market is overbought in the short term, but predicting a correction is currently very challenging.”, and it is still proving correct; the Wednesday’s rout was very short-lived and on Thursday and Friday, bulls came back with a vengeance.
For now, my short-term outlook remains neutral.
Here’s the breakdown:
- The S&P 500 is likely to open higher; it may attempt to reach a new record high.
- Currently, the market appears to be undergoing a relatively flat correction within the uptrend.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist